Monday, October 12, 2015

Angus Deaton Wins the 2015 Nobel Prize

The 2015 Nobel Prize in Economic Science was awarded to Angus Deaton this morning.

As always, the best source about this amongst economists is Tyler Cowen and Alex Tabarrok who write Marginal Revolution. Here is Alex:

... When you read that world poverty has fallen below 10% for the first time ever and you want to know how we know—
the answer is Deaton’s work on household surveys, data collection and
welfare measurement. I see Deaton’s major contribution as understanding
and measuring world poverty.

Measuring welfare sounds simple but doing it right isn’t easy. How do
you compare the standard of living in two different countries? Suppose
you simply convert incomes using exchange rates. Sorry, that doesn’t
work. Not all goods are traded so exchange rates tend to reflect the
prices of tradable goods but a large share of consumption is on
hard-to-trade services. ... A second problem is the cheese problem.
Americans consume a lot of cheese, the Chinese don’t. Is this because
the Chinese are too poor to consume cheese or because tastes differ? ... A
third problem is the warring supermarkets problem. Two supermarkets
each claim that they have the lowest prices and they are both right! How
is this possible? Consumers at supermarket A buy more of what is cheap
at A and less of what is expensive at A and vice-versa for B. Thus, it
would cost more to buy the A basket at store B and it would also cost
more to buy the B basket at store A! So which supermarket is better? ...

Deaton’s book, The Great Escape,
on growth, health and inequality is accessible and a good read. A
controversial aspect of this work is that Deaton falls squarely into the
Easterly camp (Deaton’s review of Tyranny of Experts is here) in thinking that foreign aid has probably done more harm than good.

Unfortunately, the world’s
rich countries currently are making things worse. Foreign aid –
transfers from rich countries to poor countries – has much to its
credit, particularly in terms of health care, with many people alive
today who would otherwise be dead. But foreign aid also undermines the
development of local state capacity.

This is most obvious in
countries – mostly in Africa – where the government receives aid
directly and aid flows are large relative to fiscal expenditure (often
more than half the total). Such governments need no contract with their
citizens, no parliament, and no tax-collection system. If they are
accountable to anyone, it is to the donors; but even this fails in
practice, because the donors, under pressure from their own citizens
(who rightly want to help the poor), need to disburse money just as much
as poor-country governments need to receive it, if not more so.

What about bypassing governments and giving aid directly to the poor?
Certainly, the immediate effects are likely to be better, especially in
countries where little government-to-government aid actually reaches
the poor. And it would take an astonishingly small sum of money – about
15 US cents a day from each adult in the rich world – to bring everyone
up to at least the destitution line of a dollar a day.

Yet this is no solution. Poor people need
government to lead better lives; taking government out of the loop
might improve things in the short run, but it would leave unsolved the
underlying problem. Poor countries cannot forever have their health
services run from abroad. Aid undermines what poor people need most: an
effective government that works with them for today and tomorrow.

One thing that we can
do is to agitate for our own governments to stop doing those things
that make it harder for poor countries to stop being poor. Reducing aid
is one, but so is limiting the arms trade, improving rich-country trade
and subsidy policies, providing technical advice that is not tied to
aid, and developing better drugs for diseases that do not affect rich
people. We cannot help the poor by making their already-weak governments
even weaker.